Maiden Holdings, Ltd. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017, with comparisons to 2016 and 2015. Maiden is a Bermuda-based reinsurer serving regional and specialty insurers, primarily through Diversified Reinsurance and AmTrust Reinsurance. AmTrust was the source of 70.8% of 2017 gross premiums written. Most business is quota-share reinsurance; the company generally avoids stand-alone catastrophe reinsurance.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Gross premiums written | $2.816 billion | $2.831 billion |
| Net premiums written | $2.762 billion | $2.655 billion |
| Net premiums earned | $2.733 billion | $2.568 billion |
| Total revenues | $2.921 billion | $2.732 billion |
| Net income (loss) | ($169.7 million) | $48.1 million |
| Net income (loss) attributable to common shareholders | ($199.1 million) | $15.2 million |
| Operating cash flow | $458.5 million | $470.1 million |
| Combined ratio | 111.3% | 103.2% |
| Net investment income | $166.3 million | $145.9 million |
| Loss and LAE reserves | $3.547 billion | $2.896 billion |
| Total assets / total liabilities | $6.644 billion / $5.412 billion | $6.252 billion / $4.891 billion |
Profitability and margins. The 111.3% combined ratio indicates an underwriting loss; reported underwriting loss was $277.1 million, versus $53.2 million in 2016. The loss and LAE ratio rose to 78.8% from 70.6%; the expense ratio was 32.5%, little changed. Non-GAAP operating loss attributable to common shareholders was $184.9 million, or $2.16 per share, compared with operating earnings of $17.3 million, or $0.22 per share, in 2016. Net investment income rose 14.0%, and average book yield increased to 3.1% from 3.0%.
Liquidity and capital. Cash and investments totaled $5.340 billion, including restricted assets; restricted cash and investments were approximately $4.869 billion. Operating cash flow remained positive, while investing activities used $378.9 million and financing activities used $60.4 million. Year-end principal debt was $262.5 million ($254.5 million net of issuance costs); debt was 17.6% of total capital resources. Total capital resources fell 13.3% to $1.495 billion. Common book value per share declined to $9.25 from $12.12. The company declared $0.60 per common share in dividends and repurchased 3.67 million shares for $25.7 million under its authorization.
Material changes and unusual items
- Adverse prior-year loss development was $321.5 million, compared with $165.3 million in 2016. AmTrust accounted for $239.9 million, Diversified Reinsurance for $71.4 million, and run-off business for $10.2 million. More than half of the development was associated with a $171.0 million reserve charge in the fourth quarter.
- Management also raised initial loss-ratio assumptions for current-year business in both operating segments, citing market conditions and recent loss trends. Excluding prior-year development, the consolidated loss ratio was 67.0%, versus 64.2% in 2016.
- AmTrust Reinsurance swung to a $207.1 million underwriting loss from $30.1 million of underwriting income. Its combined ratio rose to 110.8% from 98.4%; adverse development included workers’ compensation and general liability. Diversified Reinsurance recorded a $59.5 million underwriting loss, though its combined ratio improved to 107.1% from 109.4%.
- Net premiums written grew 4.0% despite a 0.5% decline in gross premiums written, mainly because Maiden used less retrocessional capacity. The retention ratio increased to 98.1% from 93.8%.
- Maiden issued $150 million of 6.7% Series D preference shares and redeemed $100 million of 8.0% 2012 Senior Notes. This lowered debt principal, but preference shares carry non-cumulative dividends and rank ahead of common equity for dividends.
- Foreign exchange shifted to a $14.9 million loss from a $11.6 million gain. The 2017 U.S. tax law change contributed a $5.0 million write-down of U.S. deferred tax liabilities and a reported $3.6 million income tax benefit.
Outlook, risks and contingencies
Management said underwriting initiatives and 2017 reserving actions were expected to improve operating returns in 2018 and support progress toward its long-term target of more than 15% operating return on common equity over the next 12–24 months. The filing gives no specific 2018 earnings or combined-ratio guidance; the long-term target had not been achieved.
Key risks include continued reserve deterioration, reliance on AmTrust and related-party arrangements, workers’ compensation and casualty loss trends, competitive pricing, investment and interest-rate exposure, foreign-exchange movements, and regulatory constraints on collateral and subsidiary dividends. Approximately 90.8% of fixed maturities and cash equivalents were pledged or restricted at year-end. The company reported no foreign-exchange hedges in force. A.M. Best maintained an A (Excellent), stable rating for the principal operating subsidiaries; after S&P downgraded its ratings in November 2017, Maiden requested their withdrawal. The AmTrust quota-share agreement was renewed through June 30, 2019, subject to termination provisions. A former executive’s whistleblower-related employment claim remained pending, with hearings expected to conclude in 2018. The 10-K reports unqualified audit opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the $321.5 million of adverse development, especially the fourth-quarter reserve charge, is sufficient or further deterioration emerges in subsequent loss reporting.
- Whether AmTrust’s claims handling, business mix and underwriting performance stabilize, given its 70.8% share of gross premiums and the large workers’ compensation and general-liability exposures.
- How much liquidity is practically available after collateral and regulatory restrictions, and whether subsidiary dividend capacity can support holding-company obligations and shareholder distributions.
- Whether the A.M. Best rating remains stable, and how the absence of an S&P rating affects client retention, new business and future access to capital.
- Whether management’s expected 2018 underwriting improvement is realized; the filing provides an outlook, not quantified guidance.
- The status and potential financial effect of the pending Turin claim, tax-law changes, and related-party collateral, loan and service arrangements.